Stepping Into the Public Light

As air is necessary to breathing, capital is the lifeblood for early-to-middle stage biobased fuels and chemicals firms looking to accelerate commercialization efforts and introduce their novel products to the marketplace. But in order to achieve their goals, they’ll need more capital in the form of cash to compete against petroleum giants that dominate the market today—a tall order.

While traditional means of raising capital, such as private equity and venture capital, remain necessary sources for funding technological developments at the R&D and pilot-scale levels, and for sustaining working capital expenditures, there is an equally effective financing alternative. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, the action is known as an initial public offering (IPO).

The act of filing an IPO shouldn’t viewed as a reflection of venture funds drying up completely, according to Andrew Soare, research associate for Lux Research. Rather, he says, an IPO is one of a few avenues biobased developers can take to obtain capital where several rounds of venture funds haven’t been enough to achieve desired performance and results.

“After several rounds of venture funding, it’s tough to justify more venture capital funding and you definitely need to turn to alternative methods,” Soare says. “One of those methods is through the public markets.”

Contrary to the dot com boom of the mid- to late-1990s, the biofuel industries have fallen short of achieving IPO success in recent years. In 2007, for example, Renewable Energy Group Inc., a biodiesel firm, cancelled its plans to raise $150 million, while Seattle-based Imperium Renewables set aside its ambitions for a $345 million IPO, in 2008. The IPO window may be widening in response to a rebounding economy, however. Today's investor seems to be more willing to evaluate each company on its merits rather than in creating a basket of everything in the sector, as in years past.

“Investors, especially IPO investors, are not looking for concepts or products that maybe won’t be made available in the next three or four years,” says Scott Sweet, managing partner for IPO Boutique, an IPO advisory firm based in Lutz, Fla. “They’re looking for top- and bottom-line growth with no debt. Emerging, yet promising [biofuel and biobased chemical companies] generally don’t meet that criterion, so one has to have a very compelling story to bring a biorefining company public right now.”

Rather than taking their companies public on a “one wave floats all” mindset dictated by favorable market conditions, biorefining companies are taking a more strategic approach today before considering an IPO.

“Successful public companies have a good handle on the milestones they intend to achieve, and how those milestones combine to create value for investors,” says Jeryl Hilleman, chief financial officer for Emeryville, Calif.-based Amyris Inc. In October, Amyris closed on its $84.8 million IPO, falling short of its $100 million target.

The key behind Amyris’ compelling story is that it has successfully developed genetically engineered and screening technology that enables the company to modify how microorganisms process sugar through their metabolic pathways. By controlling the metabolic pathways, Amyris designs microbes to serve as living “factories,” or biorefineries, to produce target molecules such as farnesene from biomass. Amyris first developed and applied its novel technology to create microbial strains that produce artemisinin, an effective antimalarial therapeutic.

“Being able to articulate and then deliver on these milestones is important right from the start of being public,” Hilleman explains. “Companies should test themselves [to ensure] if they are ready to operate with these additional pressures and timeframes in order to achieve the benefits of being public.”For firms that were successful filing and closing their IPOs, like Amyris, the decision was not easy. However, the move brings with it advantages developers can capitalize on.

It’s About TimeIn going public, the company gains the ability to tap into a broader network of investors and a larger pool of investment capital, with which it can raise more capital through additional stock offerings. It also increases investor exposure and the potential to attract and retain more highly qualified personnel. Depending on the financial standing of a company and how aggressive its commercialization efforts are, the time may not be right for some, Soare says.

“This financing act isn’t the last step for these companies,” Soare says. “They’re still far away from profitability, but it will help them gain credibility in the marketplace.”

For Amyris, its IPO gave it the attention it needed to access a broader customer base that it might not otherwise have had when it was a private entity, according to Hilleman. “Our customers are looking for long-term suppliers and conduct extensive due diligence on us as a company,” she says. “By becoming a public entity, we’re more visible to our customers on an ongoing basis, operating under the controls and governance they would expect from a supplier of key ingredients. Thus, our decision to go public was heavily influenced by our customers.”

Filing its IPO was a key driver behind Amyris’ solidifying existing manufacturing contracts while creating new ones as it works to commercialize biobased farnesene. In November, Amyris signed a manufacturing contract agreement with global agribusiness firm Tate & Lyle to produce biofarnesene at Tate & Lyle’s bulk ingredients operations in Decatur, Ill. Prior to that, the company entered into a similar agreement with a facility of Biomin GmBH in Piracicaba, Brazil. Amyris is using contract manufacturing capacity to produce farnesene at commercial scale to supply customer demand in advance of the start-up of its first commercial plant under the joint venture with Grupo Sao Martinho. The company said it expects to begin production of biobased farnesene at the Biomin facility in the first half of 2011. Amyris also has a partnership with global flavors and fragrance company Firmenich S.A. to develop a cost-effective and reliable source of a key ingredient used in the fragrances and flavors market. Oil conglomerates Royal Dutch Shell and Total have invested in Amyris and are betting on the company’s technological efforts to thrive in the biorefining sector.

According to Hilleman, Amyris doesn’t intend to become more aggressive than it already had been with its commercialization strategy of biobased farnesene, on either domestic or international fronts. “We expect to continue the same intense commercialization process that we started well before the IPO,” Hilleman says. “In fact, we believe that the fast pace and intensity we’ve brought to this process throughout our history is a big part of why we’re able to go public, having demonstrated execution over time of technical, business, production and scale-up advances.”

Looking AheadAmong other companies that joined Amyris in the IPO foray were California-based biocatalyst developer Codexis, which closed on its IPO value of $78 million in April, below its $100 million target. Prior to its successful IPO, Codexis originally filed with financial regulators to go public in April 2008, but withdrew the filing by fall of that same year. Other biorefining companies in the IPO pipeline are Gevo Inc. and PetroAlgae Inc., which both filed for IPOs in August. Gevo targeted a value of $150 million while PetroAlgae targeted $200 million. At press time, both were pending the close of value for their respective IPOs.

Although advanced biofuel and biobased chemical companies both face risks and opportunity, the renewable energy IPO market is considered less than ideal by many investors. But, according to latest data released by Lux Research in October, global biofuel capacity is forecasted to grow 7.8 percent annually to 53 billion gallons by 2015, while biomaterials are on pace to grow at a 17.7 percent per year clip to reach 8.1 million tons.

“I see a small amount of IPO filings in 2011, but only those that are highly venture backed by the best names,” Sweet says. “We’ve done far more IPOs already in 2010 than in 2008 and 2009 combined by far. I envision the IPO market to be strong in 2011.”

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